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Strategic Management Contents 1 Introduction 7 2 The Basis of Strategy: Structure 8 2.1 Introduction –definition ‘Structure’ is the allocation and control of work tasks 8 2.2 Functional Structure 8 2.3 Divisional structure 10 2.4 Product structure 11 2.5 Geographical structure 12 2.6 Matrix structure 12 2.7 Complex forms of organisation 14 3 The Levels and Formulation of Strategy 17 3.1 Introduction - definition 17 3.2 Process of strategy 17 3.3 Levels of strategy 19 3.4 Types of Strategy 19 3.5 Other Types of Strategic formulation 22 4 Schools of Strategy 24 4.1 Introduction - Definition - there are three ‘schools’ of strategy 24 Fast-track your careerPlease click the advert Masters in Management Stand out from the crowd Designed for graduates with less than one year of full-time postgraduate work experience, London Business School’s Masters in Management will expand your thinking and provide you with the foundations for a successful career in business. The programme is developed in consultation with recruiters to provide you with the key skills that top employers demand. Through 11 months of full-time study, you will gain the business knowledge and capabilities to increase your career choices and stand out from the crowd. London Business School Applications are now open for entry in September 2011. Regent’s Park London NW1 4SA United Kingdom Tel +44 (0)20 7000 7573 For more information visit www.london.edu/mim/ Email mim@london.edu email mim@london.edu or call +44 (0)20 7000 7573 www.london.edu/mim/ Download free ebooks at bookboon.com 4

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Strategic Management 1 Introduction1 IntroductionThis compendium provides a comprehensive overview of the most important topics covered in a strategy course at theBachelor, Master or MBA level. The intention is to supplement renowned strategy textbooks such as Johnson and Scholes.This compendium is designed such that it follows the structure of a typical strategy course.Throughout this compendium theory is supplemented with examples and illustrations. Download free ebooks at bookboon.com 7

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Strategic Management 2 The Basis of Strategy: Structure2 The Basis of Strategy: Structure2.1 Introduction –definition ‘Structure’ is the allocation and control of work tasksThis implies power relationships based on the acceptance of managerial power by subordinates and society – this use ofpower is termed the ‘legitimacy’ of management – which Max Weber called its ‘authority’.All organisations have some form of structure, based on ‘the established pattern of relationships among the individuals,groups and departments within it’There are two structures -- a vertical structure of authority and responsibility where clear limits of financial authority exist,and a horizontal structure of groupings of activities designed to use the resources towards goal-attainment.The horizontal structure can be changed from time to time, to suit the environment (see later sections on the internaland external environments).The basic vertical structure of an organisation is a relatively static framework within which processes such as communication,leadership and decision-making take place.In most organizations, structure will be illustrated in the form of a chart.2.2 Functional StructureThis is the most common form of structure. This divides the organisation up into its main activities or functions (production,sales, accounting and so on) in which all similar specialist activities are grouped together into interdependent departments.A manager is placed in charge of each function under the overall control of the owner or a senior manager.2.2.1 Advantages of a functional structure • Specialised resources are used efficiently. • Quality is enhanced by other specialists from the same functional area. • Opportunities exist for extensive division of labour. • A career structure enables people to advance within their functional specialism. • It is easier to manage specialists if they are grouped together, especially when the manager has the same experience. • It fosters communication between specialists and enhances the development of skill and knowledge. • It does not duplicate specialist resources throughout the organisation and promotes economies of scale. • It is suited to conditions which stress functional specialism, where the environment is stable, and when the technology is routine, requiring little interdependence between departments. Download free ebooks at bookboon.com 8

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Strategic Management 2 The Basis of Strategy: Structure Shareholders Board of directors Managing director Marketing Production Personnel Finance RD director director manager director director Machine Assembly Maintenance Distribution Management Financial department department department department accounting accounting manager manager manager manager department director Figure 2.1 Functional structure your chance to change the worldPlease click the advert Here at Ericsson we have a deep rooted belief that the innovations we make on a daily basis can have a profound effect on making the world a better place for people, business and society. Join us. In Germany we are especially looking for graduates as Integration Engineers for • Radio Access and IP Networks • IMS and IPTV We are looking forward to getting your application! To apply and for all current job openings please visit our web page: www.ericsson.com/careers Download free ebooks at bookboon.com 9

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Strategic Management 2 The Basis of Strategy: Structure2.2.2 Disadvantages of a functional structureIncreased need for interdepartmental co-ordination and scheduling.Communication, co-ordination overload the verticalhierarchy. • Inefficient co-ordination of functional departments. • Responsibility for overall outcomes is unclear. • Interdepartmental conflicts. • Little creativity and innovation. • Difficulties in identifying profitable and unprofitable products.These problems are likely to occur with professionalism and a role culture where job demarcations are felt to be important.When the organisation reaches a certain size, they are likely to be exacerbated especially if it has developed a wide rangeof products or services. Burns and Stalker (1961) devised the term ‘mechanistic’ for firms where the interconnections arestrong as they are unsuited to changeable environments and non-routine technologies.A more flexible and responsive form is needed than the rigidly functional by adopting a holding company or a divisionalstructure in which profit centres based on particular products or geographical areas are created.2.3 Divisional structureA divisional structure (see Figure 2.2 on the next page) can help to overcome the limitations of the holding companyand/or a functional structure, as it contains within it functional specialists but groups its activities around products orgeographical regions. These two ways of grouping activities are supposed to ensure a closeness to the customer which isnot really possible in a functional structure.2.3.1 Advantages of divisionalisation • It provides excellent co-ordination across functional departments. • Since departmental units are often small, as well as self-contained, employees identify with the product or project rather than their own function. • Since each division can, for example, react to customer requirements, it is well suited to changeable environments.It is particularly useful for large organisations. Cellular manufacturing can even be considered a kind of internaldivisionalisation with an emphasis on internal customers, just-in-time links between different ‘products’ and the dynamismcreated through teamwork.The emphasis on profit centres, should promote clear accountability, longer planning horizons, and the development offuture senior executives with general management experience as divisional leaders.Example: Alfred Sloan (1965) developed a true divisional structure for the disparate firms owned by General MotorsCorporation in the 1930s, bringing together a central function to garner expertise from the different firms such as Pontiac,Cadillac and Chevrolet. GM ‘leap-frogged’ over Ford, who had a functional structure, and has kept its lead ever since Download free ebooks at bookboon.com 10

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Strategic Management 2 The Basis of Strategy: Structure2.3.2 Disadvantages of divisionalisation • There may be a costly duplication of resources across departments. • Specialists may become isolated and fail to further their specialist skills. • Competing demands on people may create stress. • Co-ordination across divisions is difficult.Tension between the centre and divisions is a crucial problem of control. Too much control stifles innovationDivisional CEOs gain too much power and can introduce wild excesses of spending on favoured ‘pet’ projectsExample: in Rolls-Royce the RB211 engine project overruns nearly bankrupted the company.2.4 Product structurePeople and resources are grouped according to an organisation’s products. General Motors, has specific products - Chevrolet,Cadillac, Pontiac.This enables technical excellence and concentration on fewer product lines, and a liaison with a smaller set of customers,realising more creativity in marketing and sales through focus, teamwork and goal consensus. This format is used mostsuccessfully where there is a variety of products, each addressing different markets. Figure 2.2 Divisional structures Download free ebooks at bookboon.com 11

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Strategic Management 2 The Basis of Strategy: Structure 2.5 Geographical structure Where organisations have few products, such as IBM, they may group activities according to sales area and be literally closer to the customer. This enables regional differences to appear in marketing research. In this way IBM gets to know the details of the businesses in an area and its sales team focus on local contacts eg meeting senior people from potential clients informally at the golf club or race track 2.6 Matrix structure Divisionalisation may eventually have to be adapted to include formal mechanisms to promote closer inter-divisional collaboration: the result will be a matrix structure in which vertical and horizontal formal relationships are recognised. A matrix structure seeks to add flexibility and lateral co-ordination to the traditional vertical hierarchy. One way of doing this is to create project teams made up of members drawn from a variety of different functions or divisions: each individual then has a dual role, as he or she maintains functional/divisional responsibilities as well as membership of the project team. Example: US President John F Kennedy demanded ‘a man on the moon within ten years’. The achievement of this goal was apparently due to the new structure NASA adopted to link the functional specialists in the background departments intimately with the problem-solvers on the construction and research and development team for the Apollo mission. This mixture became known as a ‘matrix’. See Figure 2.3 on the next page what‘s missing in this equation?Please click the advert You could be one of our future talents MAERSK INTERNATIONAL TECHNOLOGY SCIENCE PROGRAMME Are you about to graduate as an engineer or geoscientist? Or have you already graduated? If so, there may be an exciting future for you with A.P. Moller - Maersk. www.maersk.com/mitas Download free ebooks at bookboon.com 12

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Strategic Management 2 The Basis of Strategy: Structure Figure 2.32.6.1 Advantages: • improves decision-making by bringing a wide range of expertise to problems that cut across departmental or divisional boundaries; • replaces formal control by direct contact; • assists in the development of managers by exposing them to company-wide problems and decisions; • improves lateral communication and co-operation between specialists. • suits rapidly changing environments because the equal balance of power between functional and product management aids communication and co-ordination. • facilitates adaptation to unfamiliar and unexpected problems. People can be flexibly relocated across products or projects, aiding the speedy implementation of new ones. Employees have the opportunity to develop either functional or general management skills. • it is useful for medium-sized organisations with a medium number of products or for task-centred organisations.2.4.2 Disadvantages: • A lack of clear responsibility; • Clashes of priority between product and function; • Functions lose control of the psychological contract; Download free ebooks at bookboon.com 13

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Strategic Management 2 The Basis of Strategy: Structure • Career development can often be stymied; • Difficult for one specialist to appraise performance of another discipline in multi-skilled teams; • Project managers are reluctant to impose authority as they may be subordinates in a later project; • Employees may be confused by reporting to two bosses; • Managers will need to be able to resolve interpersonal frictions and may need training in human relations skills; • Managers spend a great deal of time in meetings to prioritise tasks. • The complexity of the matrix structure makes it difficult to implement successfully.Indeed some commentators are very critical of this form of organisation, and question whether it should be adopted at all.Exercise:Peters and Waterman (1982, p. 307) state:‘Our favourite candidate for the wrong kind of complex response, of course, is the matrix organisation structure. Peoplearen’t sure to whom they should report for what the organisation gets paralysed because the structure not only does notmake priorities clear, it automatically dilutes priorities. In effect, it says to people down the line ‘everything is important:pay equal attention to everything.’Q: How convinced are you by the criticisms of matrix structures put forward by Peters and Waterman? Do you thinkthere are some types of situations when this form of organisation would work well?2.7 Complex forms of organisation2.7.1 Definition:The complex forms attempt to overcome the inadequacies of other structures through collaboration between existingorganisations.2.7.2 ExplanationWhy? These pressures are essentially economic and in response to Japanese and Pacific Rim, Chinese and Indian penetrationof Western markets. At the same time globalisation means that scale economies are necessary to maintain price differentialsand so mergers of parts of businesses where there is strategic fit is becoming commonplace.How? Increasingly organisations are forming complicated vertical and horizontal relationships through demergers,downsizing, delayering and margin retreat from product scope and geographical spread.What? Such organisations would range from co-operatives between organisations and their suppliers, to all forms ofpartnerships and alliances in which co-ordination of resources was based on co-operation between the parties concerned.Mergers are a form of complex organization often defensive in nature. Mergers are increasingly common - such as therecent spate of financial institutions’ mergers following the credit crunch of 2007/8. Download free ebooks at bookboon.com 14

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Strategic Management 2 The Basis of Strategy: Structure Joint ventures should mean that each sponsoring organisation has a degree of equity participation, while partnerships may not, and may or may not share assets. Consortia are short-term legal entities with sunk costs from each of the partners and which terminate at the end of the project. Alliance is a term used for a weaker non-legal-entity kind of operation where firms simply contract to work together on a gain-share/pain-share basis. Termination clauses would vary with the nature of the co-operation, as would sharing of facilities and the purchase of equipment. Example: Various partnerships exist in the automotive industry – Renault engines in Volvo cars. Networks have been described as a link between supplier and purchaser in the supply chain but a more accurate and useful division is between different suppliers, imitating the co-ordination methods employed within the firms. Example: In Italy experiments have been made to introduce networks in technologically similar industries in areas called ‘business districts’ in the textile industry, contractors are based in the same region, work for several different firms, sometimes in alliances or partnerships with other contracts, sometimes as sole contract-holder. Technology transfer opportunities arise for the major textile firms as contractors learn the businesses of other firms. Turning a challenge into a learning curve. Just another day at the office for a high performer. Accenture Boot Camp – your toughest test yetPlease click the advert Choose Accenture for a career where the variety of opportunities and challenges allows you to make a difference every day. A place where you can develop your potential and grow professionally, working alongside talented colleagues. The only place where you can learn from our unrivalled experience, while helping our global clients achieve high performance. If this is your idea of a typical working day, then Accenture is the place to be. It all starts at Boot Camp. It’s 48 hours packed with intellectual challenges and intense learning experience. that will stimulate your mind and and activities designed to let you It could be your toughest test yet, enhance your career prospects. You’ll discover what it really means to be a which is exactly what will make it spend time with other students, top high performer in business. We can’t your biggest opportunity. Accenture Consultants and special tell you everything about Boot Camp, guests. An inspirational two days but expect a fast-paced, exhilarating Find out more and apply online. Visit accenture.com/bootcamp Download free ebooks at bookboon.com 15

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Strategic Management 3 The Level and Formulation of Strategy3 The Levels and Formulation of Strategy3.1 Introduction - definitionThere is a need in modern times for strategies to achieve agreed goals and objectives, giving a sense of purpose anddirection to the organisation, because of recent technological and social changes and competition from rival organisations.In ancient Greek, ‘stratos’ was the term for the army and so in military terms, ‘strategy’ referred to ‘the act of the general’so a strategy is some sort of future plan of action, undertaken by senior management at a high level of abstraction.A strategy is the mediating force or ‘match’ between the organisation and the environment ‘according to Hofer andSchendel (1979)’3.2 Process of strategyStrategic management is the organised development of the resources of the functional areas: financial, manufacturing,marketing, technological, manpower etc, in the pursuit of its objectives. It is the use of all the entity’s resources, Deployment of Desired Strategy resources objectives Figure 3.1It is a set of policies adopted by senior management, which guides the scope and direction of the entity. It takes intoaccount the environment in which the company operates.A sequence of developing plans that move from general to specific and intent to action would create several levels ofplanning, which could be illustrated in the triangle below. Mission Objectives Strategies Tactics Actions, programmes and rules Fig 3.2 Download free ebooks at bookboon.com 17

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Strategic Management 3 The Level and Formulation of Strategy Mission - Every organisation will have a purpose for its continued existence. A mission statement expresses their purpose and can therefore be a brief statement. It also links with the idea of Vision – how managers interpret the Mission for their colleagues. Example the Avis car hire mission was simply ‘we try harder’ Objectives- do not only represent the end point of planning but are the ends towards which management activities and resource usage is directed. They therefore provide a sense of direction and a measure of success achievement. Strategies - relate to broad areas of an enterprise’s operations. Their purpose is to furnish a framework for more detailed tactical planning and action. Tactics - are actions carried out to put into effect the details of a strategic decision – tactics can therefore be seen as the detailed implementation of a strategy. In addition, some tactical decisions will be made in response to changing circumstances. Actions, programmes and rules - are the operational practices that will translate the intention of the tactics into action by individuals and are therefore detailed, short term and subject to immediate control.

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Strategic Management 3 The Level and Formulation of Strategy3.3 Levels of strategyMost academics classify strategies into three levels:3.3.1 Corporate strategy - what business or businesses the firm should be in?It relates to the future formula and structure of the company, and affects the rationale of the company and the businessin which it intends to compete.Example Racal Electronics’ decision to float off Vodafone as a separate company.3.3.2 Competitive or business strategy - how each business attempts to achieve its mission within its chosen area of activity.Here strategy is about which products or services should be developed and offered to which markets and the extent towhich the customer needs are met whilst achieving the objectives of the organisation. A term that is often used in relationto business strategy is SBU, or strategic business unit. SBU means a unit within the overall corporate entity for which thereis an external market for its goods and services, which is distinct from that of another SBU.Example: Ford’s MotorCo’s car division – an SBU - launched its Mondeo model, aimed at fleet car buyers, who had notfavoured the Sierra, its predecessor.3.3.3 perational or functional strategies - how the different functions of the business support the O corporate and business strategies. They are concerned with how the various functions of the organisation contribute to the achievement of strategyIt examines how the different functions of the business (marketing, production, finance etc) support the corporate andbusiness strategies. Such corporate planning at the operational level is means oriented and most activities are concernedonly with the ability to undertake directions.Example: revising delivery schedules and drivers’ hours to improve customer service or recruiting a German-speakingsales person to assist a UK company’s sales drive in Europe.However, the boundaries between the three categories are very indistinct and much depends upon the circumstancesprevailing and the kind of organisation. Overall, corporate planning is concerned with the scope of an organisation’sactivities and the matching of these to the organisation’s environment, its resource capabilities and the values andexpectations of its various stakeholders.3.4 Types of StrategyStrategies may come about in different ways and Mintzberg has recognised that there are different modes of strategyformulation, which are described below.The figure below shows the alternatives: Download free ebooks at bookboon.com 19

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Strategic Management 3 The Level and Formulation of Strategy Unrealised Imposed Strategy strategy Planned Deliberate Realised strategy strategy strategy Emergent strategy Opportunistic strategy Figure 3.3 Source: adapted from Mintzberg and Waters, (1985)3.4.1 Planned intended and deliberate strategy - the Rational modelPlanned or deliberate strategies come about where there are precise intentions, which are written down and imposedby a central leadership. Key features include a large number of controls to ensure surprise-free implementation in anenvironment, which is controllable, with managers who are able to ascertain, review and evaluate every option available,and they are then able to choose what appears to be the best option in the light of rational criteria. Often there is aspecialist Strategy Department.Organisations using this strategy should • be large enough to afford the costs of formal analysis • have goals that are operational. • operate in an environment that is reasonably predictable and stable. • take a systematic and structured approach to its development. • collect internal and external information and integrate decisions into a comprehensive strategy. • focus on systematic analysis, particularly in the assessment of the costs and benefits of competing proposals.Strategic planning is seen as a way of preparing for changes and providing direction for the organisation. It also allowsthe organisation to co-ordinate its activities internally.3.4.2 Emergent StrategyAccording to Mintzberg and Waters, strategies can be deliberate or emergent or a stage in-between. There is a corporateintent followed by its implementation. Sometimes this intent is not formally written down but emerges over time as partof the culture, as a series of related decisions.Example 1 Top-downA culture of like minded people who have values which coincide on a focus - on quality or a desire to be internationally Download free ebooks at bookboon.com 20

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Strategic Management 3 The Level and Formulation of Strategy known etc. Example 2 Bottom-up Out in the field, a salesman visits a customer. The product isn’t right, and together they work out some modifications. The salesman returns to the company and puts the changes through; after two or three more rounds, they finally get it right. A new product emerges, which eventually opens up a new market. The company has changed strategic course’ 3.4.3 Opportunistic Strategy Strategies may come about in or entrepreneurial ways. An organisation may take advantage of changes in the environment or recognise new skills in an opportunistic manner. Alternatively, a firm may be set up by an entrepreneur because of an opportunity in the market place. In the entrepreneurial mode, strategy-making is dominated by the active search for new opportunities, and is characterised by dramatic leaps forward in the face of uncertainty. Strategy is developed by significant bold decisions being made. Growth is the dominant goal of the organisations, and in uncertain conditions, this type of mode can result in the organisation making significant gains. Entrepreneurial mode - requires the strategy-making authority to rest with one powerful individual. The environment must be flexible, and the organisation oriented toward growth. These conditions are most typical of organisations that are small and/or young. The organisation operating in this mode suggests by its actions that the environment is not flexible, it is a force to be confronted and controlled. Power is centralised in the chief executive, with an unwillingness to ‘submit’ to authority. Brain power By 2020, wind could provide one-tenth of our planet’s electricity needs. Already today, SKF’s innovative know- how is crucial to running a large proportion of the world’s wind turbines. Up to 25 % of the generating costs relate to mainte- nance. These can be reduced dramatically thanks to our systems for on-line condition monitoring and automatic lubrication. We help make it more economical to createPlease click the advert cleaner, cheaper energy out of thin air. By sharing our experience, expertise, and creativity, industries can boost performance beyond expectations. Therefore we need the best employees who can meet this challenge! The Power of Knowledge Engineering Plug into The Power of Knowledge Engineering. Visit us at www.skf.com/knowledge Download free ebooks at bookboon.com 21

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Strategic Management 3 The Level and Formulation of Strategy3.4.4 Imposed strategyStrategy may be imposed on the organisation. Government policies may have an impact on the strategy; this has been thecase for those public utilities recently privatised. Recession and threat of a takeover may force a strategy of cost cuttingand retrenchment. Technological developments may cause an organisation to develop new products to replace the onesthat have become obsolete.3.4.5 Realised And UnrealisedThe strategy however my be reailsed and thus be successfully implemented or it may fail and remain unrealised in practice.3.5 Other Types of Strategic formulation3.5.1 Muddling throughLindblom (1959) has argued that the rational model in strategy simply does not reflect reality – and rejects the very ideaof formulation – managers just make on the spot decisions as issues arise and so just muddle through without a plan.Lindblom therefore argued that strategic choice takes place by comparing possible options against each other andconsidering which would give the best outcome. Lindblom called this strategy ‘successive limited comparisons’.NB See also the adaptive mode below for a similar view.3.5.2 Logical incrementalism - DefinitionLogical incrementalism incorporates both the behavioural realism of ‘muddling through’ and the advantages of a planned,analytical approach. This view has been championed in particular by James Quinn (1980).The outcome of this approach is a deliberate policy of small strategic changes within the framework provided by a generalsense of strategic direction.Managers have a view of where they want the organisation to be in the years to come, but they try to move towards thatobjective in an evolutionary way. They do this by attempting to develop a strong, secure but flexible core business whilstalso continually experimenting with ‘side issues’. Quinn argues that the decisions taken by management as part of thisprocess should not be reviewed in isolation.While managers are continually learning from each other, this results in continual testing and gradual strategyimplementation, which provide improved quality of information to help decision-making. Because of this continualreadjustment, the organisation should be in line with the environmental demands being placed on it.Quinn’s studies recognised that such experiments could not be the sole responsibility of the top managers but they shouldbe encouraged to come from the lower levels of the organisation. Download free ebooks at bookboon.com 22

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Strategic Management 3 The Level and Formulation of Strategy3.5.3 CraftingMintzberg (1987) likens strategy development to a potter crafting clay.‘The crafting image captures the process by which effective strategies come to be. The planning image, long popular inthe literature, distorts those processes and thereby misguides organisations that embrace it unreservedly.’It must be realised at the outset that there is no one best way of managing the strategy of an organisation. A flexible,reactive style may suit a small firm in a rapidly changing environment, whereas a large company may need to take a longterm view and plan accordingly.Strategies may come about in different ways and Mintzberg has recognised that there are different modes of strategyformulation, which are described below. His views on planned strategies dovetail with what we have already described asthe rational model, but his other two modes of strategy formulation lead on to a wider discussion.3.5.4 Adaptive modeIt is called the adaptive mode because it fits the description that managers give of how strategies come about in theirorganisations. They see their role as strategists as being involved in a continual proactive pursuit of a strategic goal,countering competitive moves and adapting to their environment whilst not rocking the boat too much.This mode is commonly found in the public sector, non-profit making organisations and in organisations that face relativelystable environments. Strategies are developed as a result of the interaction and bargaining among various power/interestgroups. As there is no one source of power or influence, strategies are not always automatically clear.Major characteristics distinguish the adaptive mode of strategy-making: • There is no one central source of power, no one simple goal. • strategy-making reflects a division of power among stakeholders - unions, managers, owners, lobby groups, government agencies, and so on. • The organisation cannot make decisions to ‘maximise’ any one goal such as profit or growth; rather it must seek solutions to its problems that satisfy the political forces of stakeholders. • Strategy is characterised by a ‘reactive’ solution to existing problems rather than the ‘proactive’ search for new opportunities • It seeks to reduce uncertainties by, for example, negotiating long-term purchasing arrangements to stabilise sources of supply. • Decisions are in incremental, serial steps. . • Strategy focuses on what is familiar, considering the convenient alternatives • Disjointed decisions are characteristic sometimes contradictory. Download free ebooks at bookboon.com 23

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Strategic Management 4 School of Strategy 4 Schools of Strategy 4.1 Introduction - Definition - there are three ‘schools’ of strategy 4.2 The ‘planning’ school (Andrews, 1987, Ansoff, 1965) • based on past trends, forecasts and stable structures and environments • uses a very bureaucratic a rational manner • tries to achieving a ‘fit’ between the organisational strategy and its environment. • Requires detailed and inflexible planning not suitable in turbulent markets. Existing product New product Expansion ie, Present Product development increase in market market or innovation penetration New Market development market (sometimes called exploration) Figure 4.1 The Ansoff Matrix Source: adapted from Ansoff 1965 Are you considering a European business degree? LEARN BUSINESS at university level. MEET a culture of new foods, We mix cases with cutting edg music ENGAGE in extra-curricular actPlease click the advert e and traditions and a new way ivities research working individual of such as case competitions, ly or in studying business in a safe, sports, teams and everyone speaks clean etc. – make new friends am English. environment – in the middle ong cbs’ Bring back valuable knowle of 18,000 students from more dge and Copenhagen, Denmark. than 80 experience to boost your car countries. eer. See what we look like and how we work on cbs.dk Download free ebooks at bookboon.com 24

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Strategic Management 4 School of StrategyExample: used in mature, stable markets and industries, public sector.4.3 The ‘positional’ school • The focus is also on a rational, analytical approach of making strategy • attempts to place the organisation and its products in a favourable market or environment. • It is heavily based on performance measurement and decision making tools. • Porter (1985) competitive advantage factors discussed in detail in other sections • Boston Consulting Group Matrix - BCG - of four cells - cash cows, stars dogs and problem children, based on income from market share and on potential market growth • GE Matrix a large three-dimensional matrix extending the BCG which is only two-dimensional High Cash Star cow Market share Problem Dog child Low Low High Market growth Fig 4.2 The BCG Matrix4.4 The ‘resource based’ schoolRobert Grant 1998, • This looks to the internal environent instead of the market, and • incorporates the ‘core competence’ approach of Prahalad and Hamel, 1994 • Based on an ‘inside-out’ approach suggesting that the competitive advantage of an organisation is based on its own distinctive resources, capabilities and competences. • Danger of ignoring the external environment. • However Grant and others do not consider culture and HRM.4.5 Key pointsThese schools are not important in individual analysis but in theoretical essays and assignments Download free ebooks at bookboon.com 25

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Strategic Management 5 Stakeholder theory5 Stakeholder Theory5.1 Introduction – definition of Stakeholdersgroups or individuals that have an interest in the well-being of the company and/or are affected by the goals, operations oractivities of the organisation or the behaviour of its members. They have a ‘stake’ in what the organisation does Freeman 19845.2 ExplanationStakeholders can be broadly categorised into:(a) internal stakeholders - employees, management, etc;(b) connected stakeholders - customers, suppliers, competitors, etc;(c) external stakeholders - government, pressure groups, etc. Managers - from the board of directors Government - tax, trade and Employees - current, pensioners employment depts. Community - local, Business strategy Debt holders - banks, individuals environmental agencies and investment institutions and the public at large Suppliers Shareholder - investment Customers - direct customers, institutions, family members, end users and consumer groups individual managers and prospective investors Figure 5.1There are obviously close links between stakeholder theory and the adaptive mode of strategy, which is discussed elsewherein this text.5.2.1 Internal stakeholdersThese include:Entrepreneurs - who wish to ‘do their own thing’ - become financial magnates, develop their own technical or commercialideas, be independent.Managers - are likely to have a particular interest, and concern for, the size and growth of the organisation and itsprofitability, job security, status, power and prestige (office size, type of company car, number of staff working for them). Download free ebooks at bookboon.com 26

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Strategic Management 5 Stakeholder theory Non-managerial employees - normally concerned with improving pay and conditions and, particularly in the current economic situation, job security. Safety, freedom from discrimination, and industrial democracy are also of concern. Employees are more productive when they have a sense of participation in the decisions affecting them. Human resource development has become a major organisational objective for many companies. West German companies have labour representation on management boards, and the Swedish company Volvo has pioneered the concept of job enrichment for assembly-line workers. 5.2.2 Connected stakeholders These include: Customers and final consumers - are interested in value for money, ethical advertising and consumer protection. A customer may be an institution, such as a hospital or government agency; it may be another firm, such as a distributor or manufacturer; or it may be an individual consumer. Suppliers - want a fair price, regular business and payment on time. Every organisation purchases raw materials, services, equipment and labour from the environment and uses them to produce its output. What the organisation brings in from the environment will determine both the quality and the price of its final product. Advances in inventory control and information processing have changed organisational relationships with suppliers. Some companies keep zero inventory, relying on several ‘just in time’ (JIT) deliveries each day. If JIT methods are in operation, this obviously results in a much closer relationship between organisations and suppliers, not only in terms of lead-time deliveries, but also in terms of quality control.Please click the advert The ﬁnancial industry needs a strong software platform That’s why we need you SimCorp is a leading provider of software solutions for the ﬁnancial industry. We work together to reach a common goal: to help our clients succeed by providing a strong, scalable IT platform that enables growth, while mitigating risk and reducing cost. At SimCorp, we value commitment and enable you to make the most of your ambitions and potential. Find your next challenge at Are you among the best qualiﬁed in ﬁnance, economics, IT or mathematics? www.simcorp.com/careers www.simcorp.com MITIGATE RISK REDUCE COST ENABLE GROWTH Download free ebooks at bookboon.com 27

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Strategic Management 5 Stakeholder theoryCompetitors - competition in an industry is rooted in its underlying economics, and competitive forces exist that go wellbeyond the established combatants in a particular industry.Competitors will therefore be concerned with the degree of rivalry between themselves in their own industry and thedegree of potential rivalry or threat of entry from others.Shareholders - are the owners of companies and are the suppliers of any additional risk capital, which may be required.The type of shareholder or shareholders that a company has, will largely determine the sort of information that can begained from them. There are basically two main types of shareholder: 1) nstitutions, usually of a large size; and i 2) private shareholders, either individuals or small groups of investors.An institutional investor is the general name given to those institutions, or firms, which make investments in stocks andother securities as principals but raise funds for investments from individuals and other firms. There are four main typesof institutional investors.Pension funds - These invest on behalf of the pension fund members in order to provide members with a retirement pension.Insurance companies - These operate on behalf of holders of life and endowment policies.Investment trust companies - These are limited liability companies, who invest in shares, property, etc, on behalf of theirown shareholders.Unit trusts - These are trusts, which invest on behalf of its unit holders.5.3 External stakeholdersThe external stakeholders include:Governments –seeking finance through taxation and other meanslegislated activities which catch votes nd political supportSafetyIndstrial harmonyDeregulation/privatisation which aims to increase efficiency and competition.Example after numerous deaths caused by fires in the homes, investigations revealed that the materials used inmanufacturing armchairs and settees were contributing to the seriousness of the fires. Due to a lack of self-regulation by Download free ebooks at bookboon.com 28

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Strategic Management 5 Stakeholder theorythis industry the government had to legislate in respect of the materials that could be used in soft furniture.Pressure groups – such as Friends of The Earth desire an improvement in the ‘quality of life’ through: • the reduction of pollution and • the maintenance of an ecological balance by ceasing to rely on non-renewable resources; • the minimisation of poverty, • assistance with local community projects • help with the young and elderly.Example, the development of the catalytic converter as part of a car’s exhaust system reduces engine performance andadds to the overall purchase price of a car. Managers, however, have no choice but to take into account today’s currentclimate of broad and genuine concern for the environment. Download free ebooks at bookboon.com 29

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Strategic Management 6 External Analysis 6 External Analysis 6.1 Introduction – Definition: External Analysis There are two parts or levels - Environmental analysis of the ‘far’ or ;macro’ environment affecting all firms, and the industry analysis of the ‘near’ or ‘micros’ environment which is much more specific. • Benefits of external analysis include • Increasing managerial awareness of environmental changes. • Increasing understanding of the context in which industries and markets function. • Increasing understanding of multinational settings. • Improving resource allocation decisions. • Facilitating risk management. • Focusing attention on the primary influences on strategic change. • Acting as an early warning system 6.2 Explanation 6.2.1 The far or macro environment The macro-environment represents forces that affect all firms across all industries.Please click the advert Download free ebooks at bookboon.com 30

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Strategic Management 6 External AnalysisThere are various suggestions as to how to define parts of an environment so as to understand them in depth. There are commonissues such as the Polticial, Economic Social and Technological influences, the PEST factors. Sometimes these are extended: • PESTEL separates out Legal from Political activity and adds Environmental. • STEEPV adds Values • SPENT adds Natural environment • STEEPLE adds EthicsThe PEST classification is rather simple and we need to take account of the fact that when we refer to political factors weare including legislation arising from political activity as a key influence.In more detail the aspects of the macro-environment are as follows:Political factors act at three levels Supranational (eg the EU) National, and Sub-national or local level..Government active areas include • Policies on healthcare, unemployment, exchange rates, inflation, economic growth • Government employment and the public sector generally • Fiscal policies on taxation • Government Agencies regulating competition pollution and industrial relations • Laws of various kinds such as those relating to protection of the environment or the safety of employees in the work place or those relating to Customer protectionEconomic factors refer to all the key economic variables often related to Political action such as • GDP (gross national product) • growth, • inflation, • Central Bank lending rates • Currency exchange rates • Fiscal policy (tax on corporations and individuals) • Regional issues like land process and labour rates • Distribution of economic rewards in society • Freedom to move monies • Stock exchanges and money markets.Social factors refer to • attitudes, values and beliefs tastes of held by people including ethnic minorities. • Culture: Attitude to work, savings and investment, ethics, etc. • Demography: Size and structure of the workforce, population shifts, aging • Social structure: class and segmentation of the market-These affect economic factors and increasingly it is necessary to take account of the above list of factors not only at thedomestic/national level but also at the global level as companies internationalise their activities. Download free ebooks at bookboon.com 31

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Strategic Management 6 External AnalysisTechnological factorsThese can be internal and external. Organizations use technology – not hardware but software too such as Quality Control– and produce products and services of varying complexity.They include • Goods and services. • Production processes. • Information and communications. • Transport and distribution. • information technology, computing and associated implications for production • biotechnology and new industries..How to use the analysis tools: • Scan the macro-environment for actual or potential changes in the PEST factors. • Assess the importance of the changes for the market, industry and business. • Analyse each of the relevant changes in detail and the relationships between them. • Assess the potential impact of the changes on the market, industry and business.6.2.2 The ‘near’ environmentThis is the ‘Industry or competitive environment analysis’ of Porter (1980).His Five Forces’ model of the competitive environment is as follows: Based on M E Porter (1979), ‘How competitive forces shape strategy’, Harvard Business Review, 57(2), March-April 1979 Figure 6.1 Download free ebooks at bookboon.com 32

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Strategic Management 6 External Analysis Barriers to entry: include such factors as capital requirements, economies of scale, product differentiation, switching costs, brand identity, access to distribution channels, and threat of retaliation. The higher the barriers to entry, the higher the potential profitability of the firms in the industry. Economies of scale. • The capital requirement of entry. • Access to distribution channels. • Cost advantages independent of size. • Expected retaliation. • Legislation or government action. • Differentiation. Competitive rivalry: the intensity of competition depends on a number of factors whether or not a strong industry leader exists, the number of competitors (degree of concentration), the presence of exit barriers, the importance of fixed costs in determining capacity, degree of product differentiation and the growth rate of the industry. Usually, rivalry is more fierce and intense when there is: • no industry leader, • a large number of competitors, • high fixed costs, • high exit barriers, Do you want your Dream Job?Please click the advert More customers get their dream job by using RedStarResume than any other resume service. RedStarResume can help you with your job application and CV. Go to: Redstarresume.com Use code “BOOKBOON” and save up to $15 (enter the discount code in the “Discount Code Box”) Download free ebooks at bookboon.com 33

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Strategic Management 6 External Analysis • little opportunity to practise product differentiation and • slow rates of growth. • Extra capacity.Supplier power is determined by such factors as importance of product to buyer, switching costs, degree of supplierconcentration to an industry and the supplier’s ability to enter an industry.Supplier power is likely to be high when: • there are few suppliers • The cost of switching to another supplier is high. • The brand of the supplier is powerful. • There is a possibility of forward integration by the supplier. • The supplier’s customers are highly fragmented so their bargaining power is low.Buyer power. The bargaining power of buyers depends on several factors, including buyer knowledge, purchase size,product function, degree of buyer concentration in an industry, degree of product differentiation and the buyers’ abilityto enter the industry.Buyer power is likely to be high when: • There is concentration of buyers. • There is a large number of small operators in the industry. • There are alternative sources of supply. • Material costs are high. • The cost of switching to another supplier is low. • There is a threat of backward integration by the buyerThreat of substitutes is important because they can de-stabilise the current industry structure by offering customers better-valued or more useful products.Forms of substitution: • Product-for-product substitution. • Substitution of need. • Generic substitution. • Product not a necessityIt is important to note that each industry will have its own unique interrelationship of the five forces and that the relativebargaining power of each of the five forces together determines the overall attractiveness or profitability in an industry. Download free ebooks at bookboon.com 34

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Strategic Management 7 Internal Analysis7 Internal Analysis7.1 Introduction and Definition of The Value ChainInternal organisation can affect the cost and even the feasibility of some strategies. There must be a ‘fit’ between a strategyand the elements of an organisation. If the strategy does not fit well, it might be expensive, or even impossible, to makeit work. This related to the Resource-Based view of the firm supported by Grant 1995.7.1.1 The value chain can be defined as ‘a framework to differentiate the value-adding activities in anorganisation’. Ii comprises primary and support activities.7.1.2 Below this section is a suggested audit of human resources and cultural aspects which are oftenhidden.7.2 ExplanationEach of the activities can be considered as adding value to an organisation’s products. For example, the activity ofoperations in a car assembly plant. While the separate components do have a value in that they can be sold and boughtas individual items, as engines, wheels, etc., but when they are assembled into a complete vehicle then they have addedvalue to customers far in excess of the individual parts.The value chain can best be described by use of a diagram as follows: Figure 7.1 The value chain Source: based on Porter (1985) p122 Fig 4-1 Download free ebooks at bookboon.com 35

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Strategic Management 7 Internal Analysis • infrastructure: - a broad term for such activities as finance, accounting, legal, government relations.7.3 Definition: marginThe difference between the cost of operations and the income from sales.7.4 Examples:The flexible, entrepreneurial organisational structure of organisations such as 3M, where new project teams and divisionsare continually created, is a key to its growth.An established centralised organisation with a background oriented to one country may have difficulty implementing adiversification strategy requiring a decentralised organisation and an entrepreneurial thrust - as the UK retailer Marksand Spencer failed in its expansion into France.7.5 The Human resource auditThere is a problem of the measurement of quality. The points below are essentially quantitative and give little or no directindication of the way in which HR can be effective –such as in employee/industrial relations. Here the benchmarking ofprocesses in a detailed qualitative survey can help.Typical benchmarks are:- • Number of employees. • Employee costs. • Level of skills and capabilities • Staff training and development. • Employee motivation and morale. • Industrial action –strikes etc • Organisational structure. • Recruitment and selection processes • How the effectiveness of HR policies and procedure is monitored.7.6 Culture:7.6.1 Definition‘that set of beliefs, customs, practices, and ways of thinking that they come to share with each other through being andworking together’ (Stacey, 1996).There are two types: organisational and corporate. The former is a deep-seated unconscious patterning; the latter oftenseen as four types f power and control operated through the organisational structure So the first is haerd to change thesecond easier. Download free ebooks at bookboon.com 37

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Strategic Management 7 Internal Analysis7.6.2 Explanation: The importance of culture • Employee motivation. • Recruitment. • Employee morale. • Productivity and efficiency. • Quality of product/service. • Industrial relations. • Innovation and creativity7.6.3 Artefacts and evidence for organisational culture • The measures of culture can be seen typically in • philosophy/ideas of the entrepreneur. • activities of the organisation. • competitive nature of the industry. • management style. • national/regional beliefs and attitudes. • dependency of the organisation on technology • status and location of offices and other buildings • style/cost of buildings and furnishings.7.6.4 How these come about: The Cultural web Fig 7.6 The Cultural web Source: based on Johnson 1988 Download free ebooks at bookboon.com 38

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Strategic Management 7 Internal Analysis • Stories: Events and people from the past and present. • Rituals and routines: Procedures for doing things within the organisation. • Control systems: The level of control by which activities are controlled. • Organisational structures: Formal and informal power relationships. • Power structures: Groups/functions/departments of the organisation that are associated with the core assumptions of the organisation. • Symbols: Logos, office layouts, titles, etc. that reflect hierarchy or difference. • Paradigm: Encapsulates and reinforces the behaviours observed in the other elements of the web. 7.6.5 Corporate culture Definition: Harrison called corporate cultures ‘organisational ideologies’ or ‘the way we do things round here’ Harrison’s questionnaire method produced four distinct types: • Power cultures, based on one or a few powerful central individuals who motivate by a combination of patronage and fear, and make little use of written rules (this is likely to be the dominant type of culture in small, family-managed businesses). • Role cultures, which are impersonal and rely on formalised rules and procedures to guide decision-making in a standardised, bureaucratic way (e.g. civil service and traditional, mechanistic mass-production organisations). • Task or achievement cultures, which are typified by teamwork, flexibility and commitment to achieving objectives, rather than emphasis on a formal hierarchy of authority (perhaps typical of some advertisingPlease click the advert Download free ebooks at bookboon.com 39

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Strategic Management 7 Internal Analysis agencies and software development organisations, and the desired culture in large organisations seeking total quality management). • People or support cultures, of two types. The first type is a constellation of stars, based on technical expertise of individual employees -- architects’ and solicitors’ practices, IT and management consultants. The organisation is what these few people possess as skills. Other types of organisation exist for the benefit of the members rather than external stakeholders, and are based on friendship, belonging and consensus (e.g. some social clubs, informal aspects of many organisations).Clearly these need to match the external environment if at all possible. Download free ebooks at bookboon.com 40

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Strategic Management 8 SWOT Analysis8 SWOT Analysis8.1 Introduction SWOT Analysis -definitionSWOT Analysis means the internal Strengths and Weaknesses and external Opportunities and Threats of an organisation.8.2 ExplanationThe central purpose of the SWOT analysis is to identify strategies that align, fit or match an organisation’s resources andcapabilities to the demands of the environment in which the organisation competes.To put it another way, the purpose of the strategic alternatives generated by a SWOT analysis should be to build onorganisation strengths in order to exploit opportunities and counter threats and to correct organisational weaknesses.Strategic choice is the process of choosing among the alternatives generated by a SWOT analysis. The organisation has toevaluate various alternatives against each other with respect to their ability to achieve major goals. The process of strategicchoice requires the organisation to identify the set of business-level, functional-level and corporate-level, strategies thatwould best enable it to survive and prosper in the fast-changing environment that is a feature of modern business.8.2.1 Strengths. • Core competencies in key areas. • Adequate financial resources. • Well-thought-of by buyers. • An acknowledged market leader. • Well-conceived functional area strategies. • Access to economies of scale. • Insulated (at least somewhat) from strong competitive pressures. • Proprietary technology. • Cost advantages. • Better advertising campaigns. • Product innovation skills. • Proven management. • Ahead on experience curve. • Better manufacturing capability. • Superior technological skills.8.2.2 Weaknesses • No clear strategic direction. • Obsolete facilities. • Profitability issues because… Download free ebooks at bookboon.com 41